Despite incompetent SEC, more evidence Wall Street is rigged against us little guys
“Hollywood” Henderson famously said of Steelers quarterback Terry Bradshaw, “He couldn’t spell ‘Cat’ if you spotted him the ‘c’ and the ‘a’.”
If the SEC (Securities & Exchange Commission) played in the NFL, it would be Bradshaw. Amazingly, the SEC failed to stop Bernie Madoff’s $50 billion Ponzi scheme even after being told in exquisite detail — over the course of nine years — that Madoff was running a Ponzi scheme and how he was doing it:
Madoff avoided scrutiny despite the dogged bell-ringing of a Boston accountant, [Harry Markopolos], who repeatedly accused Madoff of breaking the law in a series of letters to the SEC that began in 1999…
A former SEC enforcement official said the letters should have raised red flags for regulators.
“It is not common to get complaints about somebody who’s running a large amount of money that it’s a Ponzi scheme,” said the former official, speaking on condition of anonymity.
He said that investigating a Ponzi scheme is not difficult: The agency can simply demand proof that the investment adviser holds the amount of money he claims to hold. And he added that regulators also should have noticed that Madoff was audited by a tiny company with no reputation. He said there are only a few accounting firms with the sophistication to audit an investment adviser that, at the time of registration with the SEC, reported $17 billion on assets. Regulators should have noticed instantly, he said, that Madoff’s auditor was not on the list.
The enormity of the SEC’s failure is obvious from the 477-page report it created to document its parade of errors.
Someone in the SEC even invested with Madoff, despite the repeated tips:
The family of a Security and Exchange Commission investigator, whose office received a tip that Bernie Madoff was running a Ponzi scheme, invested $2 million in the scam, the agency’s report said.
The tip to the Office of Internet Enforcement in 2005 was among at least six warnings the SEC received but failed to fully investigate since 1992, Inspector General David Kotz said in a report released Friday night.
Even the beyond-brazen Madoff was shocked by the SEC’s incompetence:
Madoff, 71, told Inspector General H. David Kotz’s office this year that after being questioned in May 2006 and giving his account number at Depository Trust Co., an independent clearing agency, “I thought it was the end game, over. Monday morning they’ll call DTC and this will be over.” When that never happened, Madoff was “astonished,” according to a summary Kotz issued yesterday. The Ponzi scheme continued for 2 ½ years.
“This was perhaps the most egregious failure in the enforcement investigation of Madoff,” Kotz’s report said. “They never verified Madoff’s purported trading with any independent third parties.” By checking with the clearing agency, the SEC would have “immediately realized that Madoff was not trading in anywhere near the volume that he was showing on the customer statements.”
Given such financial regulatory incompetence, it’s especially worrying to learn that a multi-billion-dollar hedge fund has been systematically profiting from inside information. Given the shoddiness of federal regulators, this is almost certainly the tip of a proverbial iceberg.
We now know that some “smart money” really is smart… if by “smart,” you mean willing and able to illegally access and profit from inside information:
[The Galleon Group hedge fund’s] success was achieved more by guile than genius, said U.S. Securities and Exchange Commission enforcement chief Robert Khuzami, who sued [Galleon founder Raj] Rajaratnam and the others last week.
“He is not the astute student of company fundamentals or marketplace trends that he is widely thought to be,” Khuzami said at an Oct. 16 press conference. “He is not a master of the universe but rather a master of the Rolodex.”
…The wire transcripts laid out in criminal and civil complaints make it appear that trafficking in inside information was a routine way of business for Rajaratnam. The starting point for this case was a 2005 job interview at Manhattan-based Galleon, at which Rajaratnam asked the applicant to name companies where he had an “edge,” — access to inside information, prosecutors said.
The applicant, who would became the government’s key confidential witness, mentioned Polycom Inc. The witness had gotten advance word from a friend there on the company’s quarterly earnings, according to prosecutors.
The informant wasn’t hired by Galleon. Instead, the witness began feeding Rajaratnam inside information on Pleasanton, California-based Polycom and two other companies, Mountain View, California-based Google Inc. and McLean-based Hilton Hotels Corp. Galleon allegedly turned a $4 million profit on the tip about Blackstone Group LP’s $20 billion buyout of Hilton the day before the announcement. The informant in return received inside information from Rajaratnam on Intel and other companies, according to the complaint…
A Sept. 9, 2008, call between Chiesi and her contact there illustrates the information-swapping process. After discussing whether Cambridge, Massachusetts-based Akamai would be buying back stock, Chiesi told her source, according to the transcript, “I want you to buy AMD … before the end of the month. Nothing’s gonna happen next week, but the week after … I think I’ve got a big deal.”
The Akamai executive replied, “Okay, okay, good. I really appreciate that.”
On Oct. 10, 2008, the tipster called Chiesi, saying, “I’m gonna come visit you in New York, and I’m gonna give you a present. But it has to be face to face.” She asked what he was talking about, and the Akamai executive replied, “Information.” Chiesi said, according to the transcript. “Well, that is a great present.”
Financial economists have long debated whether stock prices reflect all public information about companies or all public and private information. We now know — despite a virtually deaf-and-dumb SEC — that at least some big financial players have been systematically harvesting and taking advantage of private information about companies that ordinary investors have no access to. Given how pathetic our financial regulatory structure is, we can only speculate how widespread these problems are.
Posted by James on Monday, October 19, 2009